This economy is . . . more heated than Pluto

The Economy

August 19, 1996|By Jay Hancock

WHEN scientists' models of reality stop working, first they check their math.

Then they check reality.

Astronomer Percival Lowell deduced the existence of Pluto by observing the crooked orbit of Neptune. A similarly small anomaly, this one in the economic universe, may be telling us something equally portentous about the country's future.

The unexplained phenomenon is a bulge in federal tax collections.

The theoretical, unseen object behind it is economic growth -- growth that surpasses the official figures, growth that is beyond statisticians' telescopes.

In the first half of this year, the government collected $1.091 trillion in all kinds of taxes.

That's 7.2 percent more than in the first half of 1995 and at least $20 billion more than people expected.

Because the IRS's intake valves are attached to the economy's every node and nook, there's a tight relationship between federal collections and the gross domestic product, or GDP.

People spend entire careers divining commerce's effect on government revenue, and the effect is thought to be well understood.

But lately dollars have been piling up in Treasury Department tills three times faster than government analysts say the economy itself is growing.

Something doesn't jibe, some analysts think.

"If you look at the amount of revenue that the government is taking in, it's far above the projection that you'd get using 2.5 percent GDP growth," said David Orr, chief capital markets economist for First Union Corp., a Charlotte, N.C.-based bank.

"My hunch is that the economy is actually growing faster than they know how to measure. The cash coming into the Treasury doesn't lie."

Orr hasn't tried to analyze his hunch. But if he's right, it's reason to uncork the Andre and make a down payment on the Lumina.

Nobody is saying the economy is swelling by 7 percent annually. But even if it's currently growing at an average annual rate of, say, 3.5 percent instead of 2.5 percent, much of this year's debate over economic policy gets viewed through a different prism.

A one percentage-point bonus of "dark GDP" this year would mean that the economy is able to expand much faster than previously believed without kicking up inflation.

It would mean that Federal Reserve Chairman Alan Greenspan can let unemployment sink to very low levels before worrying about economic overheating.

It would imply that the enormous changes of the past 15 years have so transformed the economy as to belie much of the recent pessimism about it.

If the noninflationary economic speed limit really is 3.5 percent instead of 2.5 percent, that's the difference between a bankrupt Social Security system three decades hence, to take one small example, and one that's flush.

Stealth growth would explain why reported productivity, the ultimate gauge of living standards and economic happiness, hasn't been boosted by computers and communications advances as much as everybody expected.

Relax, Chairman Greenspan. Higher productivity growth and the "soaring prosperity" promised by both presidential candidates may finally be here. The evidence may be sitting in the government's collection plates.

To believe in dark GDP is to believe that the economy has morphed into something beyond the ken of the Commerce Department's statisticians. There are reasons to believe.

The value of mutual fund management, psychological advice, pizza delivery and the other blocks of today's service economy is much harder to gauge than the ingots, bales and truckloads of yesterday's factory economy. And the government data-gatherers who are trying to keep up with it all are starved for resources.

Many economists don't buy the missing-growth story, however.

They credit the revenue spurt not to a healthier economy but to increased capital-gains tax collections and delayed effects of President Clinton's tax increase a few years ago. And federal collections never flow evenly anyway, they say.

A rebound from government shutdowns may have contributed to the gush, "and we think there was something funny going on with withholding last year," said Aldona Robbins, a research fellow with the Institute for Policy Innovation. "I don't see a great surge in revenues."

Orr still suspects that something interesting is going on.

"The difference is striking" between this and last year's federal harvest, he said. "Maybe a third of the differential could be explained by capital-gains taxes, and maybe even some lingering effects of the tax increase."

But maybe what's left requires a rethinking of the economic solar system.

Or maybe not.

At the same time that he was predicting the discovery of Pluto, Percival Lowell was also insisting on the existence of intelligent, canal-digging, crop-growing Martians.

Pub Date: 8/19/96

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